Ethics opinion addresses lawyers’ 'passive investment' in firms in jurisdictions allowing alternative business structures

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A lawyer generally may invest passively in a law firm that includes nonlawyer owners in jurisdictions that permit such alternative business structures, according to a new ABA ethics opinion. The lawyer may passively invest, even though the lawyer practices law in a jurisdiction that does not permit such nonlawyer ownership.

Most jurisdictions follow Model Rule 5.4 of the ABA Model Rules of Professional Conduct, which prohibits nonlawyer ownership of law firms. The rule also prohibits lawyers from sharing fees or forming partnerships with nonlawyers.

However, a few jurisdictions have modified Rule 5.4 to permit nonlawyer ownership of firms and the sharing of legal fees. These jurisdictions include Arizona, the District of Columbia and Utah.

Arizona has been the boldest. Earlier this year, it eliminated Rule 5.4 and allowed nonlawyer owners or investors in law firms to be certified as alternative business structures.

Because some jurisdictions allow nonlawyer ownership, the question arises whether a lawyer practicing in a jurisdiction that adheres to a version of Rule 5.4 (a “Model Rule Lawyer”) may invest in an alternative business structure in another jurisdiction.

Formal Opinion 499, released Wednesday, says yes, though the lawyer must be cognizant of possible conflict of interests that could arise.

An ABA press release is here.

The opinion discusses choice-of-law issues and determines that the law of the jurisdiction that permits the alternative business structures would control. The opinion spends more time on conflict of interest risks: “A passive investment in an ABS, without more, does not mean that the Model Rule Lawyer is practicing law through the ABS.” Furthermore, a passive investment does not create an “of counsel” relationship.

However, “Model Rule Lawyers” who are passive investors in an alternative business structure must consider the possibility of “concurrent conflicts of interest that could arise from the Model Rule Lawyer’s representation of clients in the Model Rule jurisdiction.”

For example, a lawyer could have a conflict of interest under Model Rule 1.7(a)(2) if they make an investment in an alternative business structure and they have a client with an interest that is adverse to the alternative business structure.

Thus, if a lawyer advocated against a client of the alternative business structure or represented a business in a transactional matter requiring negotiation with a client of the alternative business structure, there could be a “significant risk” that the lawyer would be materially limited in their representation of the client because of their role with the alternative business structure.

The opinion further elucidates that in such a situation, the investing “Model Rule Lawyer” cannot represent the client, but such a personal interest conflict would not be imputed to the lawyer’s law firm. The opinion explains that, “if, however, the Model Rule Lawyer’s investment in an ABS will create a conflict of interest at the time of the investment, the Model Rule Lawyer would need to refrain from the investment unless the conflict can be resolved appropriately under Model Rule 1.7(b).”

The opinion did not address “the issue of disclosure of confidential information by an ABS,” stating that such is “beyond the scope of this opinion.”

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